Restraining Government in America and Around the World

Revenge of the Laffer Curve

Steve Moore and Art Laffer have an excellent column in today’s Wall Street Journal. They explain that high-tax states drive repel entrepreneurs and investors, leading to a pronounced Laffer Curve effect. Productive people either leave the state or choose to earn and report less taxable income. And because growth is weaker than in low-tax states, there also is a negative impact on lower-income and middle-class people:

Here’s the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states. …Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts. …Dozens of academic studies — old and new — have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses. …Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the “soak the rich” tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average.

Interestingly, the Baltimore Sun last week published anarticle noting that the soak-the-rich tax imposed last year is backfiring. There are fewer rich people, less taxable income, and lower tax revenue. To be sure, some of this is the result of a nationwide downturn, but the research cited by Moore and Laffer certainly suggest that the state revenue shortfall will continue even after than national economy recovers:

A year ago, Maryland became one of the first states in the nation to create a higher tax bracket for millionaires as part of a broader package of maneuvers intended to help balance the state’s finances and make the tax code more progressive.But as the state comptroller’s office sifts through this year’s returns, it is finding that the number of Marylanders with more than $1 million in taxable income who filed by the end of April has fallen by one-third, to about 2,000. Taxes collected from those returns as of last month have declined by roughly $100 million. …Karen Syrylo, a tax expert with the Maryland Chamber of Commerce, which lobbied against the millionaire bracket, said she has heard from colleagues who are attorneys and accountants that their clients moved out of state to avoid the new tax rate. She said that some Maryland jurisdictions boast some of the highest combined state and local income tax burdens in the country. “Maryland is such a small state, and it is so easy to move a few miles south to Virginia or a few miles north to Pennsylvania,” Syrylo said. “So there are millionaires who are no longer going to be filing Maryland tax returns.”

With President Obama proposing higher tax rates for the entire nation, perhaps this is a good time to remind people about the three-part video series on the Laffer Curve that I narrated. If you have not yet had a chance to watch them, the videos are embedded here for your viewing pleasure:

[…] potential for growth. This means less economic output, which also means a smaller tax base. This Laffer Curve effect doesn’t necessarily mean less revenue, but it certainly means that tax increases rarely raise as […]

[…] potential for growth. This means less economic output, which also means a smaller tax base. This Laffer Curve effect doesn’t necessarily mean less revenue, but it certainly means that tax increases rarely raise as […]

[…] get up to speed on these issues, the sooner they can help give politicians good advice so that the Laffer Curve doesn’t cause more unpleasant surprises. Like this:LikeBe the first to like this. By Everette Hatcher III, on July 24, 2012 at 12:16 pm, […]

[…] get up to speed on these issues, the sooner they can help give politicians good advice so that the Laffer Curve doesn’t cause more unpleasant surprises. Daniel J. Mitchell • July 2, 2012 @ 9:57 am Filed under: General; […]

[…] get up to speed on these issues, the sooner they can help give politicians good advice so that the Laffer Curve doesn’t cause more unpleasant surprises. Rate this:Share this:PrintEmailFacebookTwitterMoredeliciousDiggFarkLinkedInRedditStumbleUponLike […]

[…] years, I’ve shown lots of evidence from around the world (England, Spain, and France) and in various states (Illinois, Oregon, Florida, Maryland, and New York) to make the case that it is foolish to ignore […]

[…] in the other direction for taxable income. This should be an uncontroversial proposition, and these three videos explain Laffer Curve theory, evidence, and revenue-estimating issues. Richard Rahn also gives a […]

[…] few years, I’ve shown lots of evidence from around the world (England, Spain, and France) and in various states to make the case that it is foolish to ignore the Laffer Curve. Not surprisingly, leftists never […]

[…] years, I’ve shown lots of evidence from around the world (England, Spain, and France) and in various states (Illinois, Oregon, Florida, Maryland, and New York) to make the case that it is foolish to ignore […]

[…] years, I’ve shown lots of evidence from around the world (England, Spain, and France) and in various states (Illinois, Oregon, Florida, Maryland, and New York) to make the case that it is foolish to ignore […]

[…] that if they punish success too much, they won’t actually get any additional money to spend, but that’s a separate issue). This is why it’s been amusing to watch nations in Eastern Europe adopt flat tax systems and […]

[…] shift in the other direction for taxable income. This should be an uncontroversial proposition, and these three videos explain Laffer Curve theory, evidence, and revenue-estimating issues. Richard Rahn also gives a good […]

[…] that if they punish success too much, they won’t actually get any additional money to spend, but that’s a separate issue). This is why it’s been amusing to watch nations in Eastern Europe adopt flat tax systems and […]

[…] if they punish success too much, they won’t actually get any additional money to spend, but that’s a separate issue). This is why it’s been amusing to watch nations in Eastern Europe adopt flat tax systems and […]

[…] foreign-source income. You would think that, sooner or later, the left would realize they can get more tax revenue with reasonable tax rates. But that assumes that collectivists are motivated by revenue maximization rather than spite and […]

[…] foreign-source income. You would think that, sooner or later, the left would realize they can get more tax revenue with reasonable tax rates. But that assumes that collectivists are motivated by revenue maximization rather than spite and […]

[…] foreign-source income. You would think that, sooner or later, the left would realize they can get more tax revenue with reasonable tax rates. But that assumes that collectivists are motivated by revenue maximization rather than spite and […]

[…] Please pardon the terrible pun that is the title of this post. However, if you’re an economics nerd like me, then you probably found it humorous (even if you won’t admit it). But I digress. To explain the economic phenomenon known as the Laffer Curve, here are three videos by Cato economics expert Daniel J. Mitchell, Ph.D. […]

[…] shift in the other direction for taxable income. This should be an uncontroversial proposition, and these three videos explain Laffer Curve theory, evidence, and revenue-estimating issues. Richard Rahn also gives a good […]

[…] shift in the other direction for taxable income. This should be an uncontroversial proposition, and these three videos explain Laffer Curve theory, evidence, and revenue-estimating issues. Richard Rahn also gives a good […]

[…] 90 percent tax on bank bonus payments. I don’t know if lawmakers in Athens have heard of the Laffer Curve, but they’re about to get a real-world lesson that will teach them how punitive tax rates […]